By Brandes Elitch
CrossCheck Inc.
I've written about similarities between the Sonoma County wine industry and the payments industry previously, and I continue to find parallels between the two. For example, you might say that in both cases, the agenda for the next few years is to replace rootstock. Here's why.
Way back in 1976, California wines won the Paris Wine Tasting. Local growers rushed to plant rootstock to meet the sudden demand. Nurseries grafted European vines to native American rootstock. However, in the 1980s, they found the new American rootstock, ARx1, was not, as previously believed, resistant to phylloxera, a root-eating pest for which there is no cure. As a result, about 60 percent of the newly planted vines died.
Around 1990, growers ripped out millions of vines and spent a billion dollars to replace them. But vines don't last forever; they start to reach old age after about 20 years, which means, vines planted in 1990 are due for replacement now. Growers are taking action. For example, Robert Mondavi Winery is replacing 1.5 million vines, just in its own vineyards.
Growers have become smarter, too. They learned more about the local terroir, the soil, and how to plant and orient vines that are better suited to their microclimates. They are reconfiguring rows to prevent erosion or to allow mechanical harvesting to replace the workers, who are getting harder to find every year. So there is a big demand for new rootstock, but guess what? It's sold out for 2013. Growers placing orders for rootstock now will get deliveries in 2014 and 2015. The greenhouses are all full, and there is no more room for plantings.
What does this have to do with the payments industry? Payments based in the physical world and routed through card networks, with all of their attendant restrictions, are reaching the end of their ability to satisfy consumers' needs. Thus, the rootstock is becoming obsolete and must be replaced, just like the 20-year-old vines. The question is, with what?
Let's start with Facebook. Social psychologist and digital ethnographer Paul Marsden did an analysis on his Viralculture website, www.viralculture.com, about social media e-commerce. Marsden listed eight reasons why Facebook will succeed as a payment platform. I won't repeat them all here, but it comes down to the fact that it's where your customers are.
Did you know that there is something called "f-commerce?" It's e-commerce transacted on Facebook. The Australian wine merchant Winestore.com.au is selling wine on Facebook. The company also uses Facebook to drive sales to its fans and lock in fan loyalty. For instance, it gives fans placing orders via Facebook a free case of wine, special mixed cases or free delivery - something they cannot get from any other channel. The company also uses Facebook to remind fans regularly about its store.
Here are some quotes worth pondering:
In his new e-book, The Amazon Economy, Barney Jopson wrote, "Amazon's economic influence has lifted beyond Apple, Google, and Facebook, and entered the realm of network businesses, such as stock exchanges, power grid operators, credit card processors, and shipping lines." This means that even if you don't use Amazon Inc. directly, if you use Spotify, Netflix and Dropbox, for example, you are paying Amazon indirectly, because those companies use Amazon's cloud-computing service. Nobody would have predicted this five years ago. Another example of the changing payments landscape is the music business. My son is a rock drummer, so I pay attention to this space. Subscription services (Spotify, for example), and streaming radio (Pandora, for example) are now mainstream, along with download services such as iTunes and Amazon MP3.
Also, Microsoft Corp.'s new Xbox Music is bundled with every copy of Windows 8. Apple Inc. and Google Inc. are rumored to be entering the subscription space, too. The big question is whether fans will want to buy and own songs, or just rent them. Some people believe that when Apple offers a subscription service that is compatible with their devices, consumers will just start renting music, not buying it.
Apple could come up with an alternative to user names and passwords by offering functionality upgrades such as fingerprint identification and facial recognition. In 2012, Apple acquired fingerprint technology firm AuthenTec and has applied for patents in fingerprint technology. Just think about the impact when connected to a mobile wallet at the POS, or even in a card-not-present environment. Or imagine if you were trying to construct a revenue model for the music industry next year. Where would you start?
One of my favorite analysts, Nikki Baird of RSR Research LLC, said in a recent column at RSR's website, www.rsrresearch.com, that the future of payments has arrived, but we don't know yet what it will look like. "The payments process is a critical piece of the overall customer experience," she wrote. "[I]t's about taking payments the way that customers want to make them, it's about recognizing payments as another 'moment of truth' in the retail relationship. It's about making it easier for customers to do business."
Baird pointed out that significant barriers remain, including the existing retailer infrastructure around payments. She said that "combining and managing both the high-risk world of card-not-present transactions alongside a payment infrastructure that knew Reagan as president is starting to get in the way, especially as payment providers take aim at the store, where the majority of transactions will still happen."
When we talk about infrastructure in the ISO world, we are talking, fundamentally, about MasterCard Worldwide and Visa Inc. As Georgetown Law School Professor Adam Levitin pointed out, Visa exists today because of federal banking regulations that prevented interstate banking, dating back to the 1960s. He stated in an article posted at www.creditslips.org that Visa's rationale is coordinating interchange rates and rules for the member banks. If you take away that coordinating role, it is "a really big computer clearing transactions ... and anyone with sufficient capital can get into that game," he wrote.
This means that any very large bank (and there are perhaps a dozen of them) could start its own payment network. If a bank can clear transactions cheaper than Visa, why wouldn't it do so? Visa's primary orientation is to the large issuing banks, because those banks issue most of the cards with the Visa brand, and they get most of the interchange. But a large stand-alone bank would not need to rely on competing banks to issue cards; it could do it alone. And if it is not competing to sign up other banks to its network, it could create new services or better products.
Skeptical? Well, for starters, Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. would already be bigger than American Express Co. or Discover Financial Services. If everything else were equal, of course a merchant would accept their cards if it meant making a sale. The bank could switch its existing cardholders to its new brand pretty easily.
Now extrapolate this to perhaps a dozen large banks all starting their own networks. Running the network for all these banks could be done by each bank individually, or it could be done by a common party, say Amazon, or Facebook, or PayPal Inc., or even a telephone carrier.
A large bank would have another advantage: unlike Visa, it could offer credit to its own customers, who already have demand deposit accounts (DDAs) there. This would give the bank significant revenues from interest repayments. Yes, lending is a risky business, but when you are lending to your own banking customers, it is a lot easier to construct valid risk profiles, hold funds, delay settlement, etc.
Also, the large banks can do real-time debit without using existing electronic funds transfer railroad tracks. They can use their own core DDA system directly, use the automated clearing house network (in conjunction with effective user identification measures) or they could just transact in the cloud.
My company's core product is check guarantee. Occasionally, I get questions such as "who writes checks anymore?" The people who ask this have forgotten a crucial point: all payments begin and end in the DDA account. If banks really thought about this, they would realize the most important part of their customer relationship is the DDA account, not offering a card on behalf of the Visa brand.
I predict we will see more serious thinking along these lines as banks and merchants get serious about managing their payments. As an ISO or merchant level salesperson, you might want to think about how you can adapt so you can thrive when some of these things come to pass.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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